The Martin Armstrong Saga

Con-man or Visionary?

March 27, 2000

Editor's Note: The author cites various Internet sources to corroborate his assertions, observations and conclusions. These are noted within the text as a Link number. However, the actual link locations are listed at end of the article.

As has been widely reported in the US press, Martin A. Armstrong, the founder and chairman of Princeton Economics Institute (PEI) now resides at the Metropolitan Correction Center in New York. He has a court appointed defense lawyer on the criminal charges, is jailed on contempt of court charges and whether he is guilty or innocent of the charges brought against him, his situation and the circumstances surrounding these events are interesting to say the least.

This article examines some of the events that did take place prior to his arrest, that occurred at the time of his arrest and that have occurred since. Whether Armstrong is guilty or not is another matter and eventually the US judicial system will make that decision.

It has been widely known for some time (and often reported upon), that the Japanese banking system is riddled with bad loans. Technically many Japanese banks are insolvent. Reporting requirements have allowed assets to be valued at cost, even though the current value of these assets is now considerably less than when they were acquired. Articles in several magazines began to appear in 1998 about Japanese companies that were able to postpone reporting losses by using complicated derivative contracts, put together by "foreign" banking groups.

Late in 1998 the Financial Services Authority (FSA), a Japanese Government agency, began investigating the activities of Credit Suisse First Boston (CSFB) Tokyo's office. The investigation was centered round the allegation that CSFBs derivatives unit had assisted in helping clients to cover up losses. These clients, according to a Financial Times article dated May 10th, included Long Term Credit Bank and Nippon Credit Bank. (LINK 1)

It was further reported (AFP May 24, 1999) that: " Japan's financial watchdog, the FSA began investigating operations of Cresvale International Ltd (CIL), its third target on a foreign bank in Japan. The FSA is looking into CIL's risk management and the legality of some of it's transactions. The agency began inspecting Swiss banking giant Credit Suisse group in January and Lehman Brothers Inc of the United States in May it said." (LINK 2)

Meanwhile during the month of May, HSBC Holdings announced it would acquire Republic New York Bank, in a deal valued at $10.3 billion. (LINK 3) A subsidiary of this bank was the entity that Armstrong used to trade various futures contracts.

On July 16th, Princeton Economics published an article by Martin Armstrong entitled "Credit Swiss vs. Japan – Is it time to sell the Nikkei?" In it Armstrong raised some serious issues about how he perceived what was taking place within the FSA. He also took a swipe at the CFTC, a long time Armstrong foe.

On July 29, the FSA announced the results of its investigation into CSFB. (LINK 4) It found that some products sold by CSFB's Tokyo branch, such as those utilizing a "credit liquidation scheme" were extremely inappropriate from the standpoint of adequate disclosure of its client's financial conditions.

What Armstrong had pointed out in his July 16th article was the fact that the FSA seemed to have varying standards when it came to approving and disapproving certain transactions and as these approvals were given in secret on a case by case basis, nobody knew what the standards were.

Early in September (LINK 5) a request from the FSA was sent to Republic Bank of New York requesting confirmation of funds held on deposit as Trustee for an Armstrong sponsored investment. The amount referred to was large. It seems that Republic Bank (at that time the subject of a large takeover offer from HSBC Holdings PLC) passed this request on to US regulatory authorities shortly after it was received.

Then on September 13th 1999 criminal and civil charges were filed against Armstrong in the US District Court in Manhattan. (LINK 6) The US Attorney's office, the SEC and the CFTC had all filed charges against Armstrong. The US Attorney, Mary Jo White was quoted as saying: "This case should send a clear and concise message that those who commit securities fraud in the United States, even if they use offshore entities and victimize foreign investors, cannot escape responsibility for their actions".

Republic New York Securities Corp, a wholly owned subsidiary of Republic New York, is reported as having suspended their chief executive James E Sweeney and replaced the management of its futures trading division. Why?

According to a report from CNN fn dated September 13, (LINK 7), the arrests and charges culminate an investigation that began earlier this month after the FSA received a letter detailing suspicious activities of a client of Republic's Philadelphia office. The FSA informed Republic - and at some stage the Federal Government became involved. This same report states that Armstrong allegedly bilked the funds with the help of a senior executive at Republic. A receiver was appointed, and all assets of PEI were seized. Even funds given by Armstrong to his lawyer were eventually ordered returned.

These events certainly took place in a short period of time. An apparent complex fraud involving a large amount of money, committed in Japan, executed in the United States, involving at least a preliminary investigation by US authorities is indicted in less than two weeks. Six months later nobody else has been charged.

On October 28th, 1999, the FSA ordered CIL to suspend all securities business operations until January 14, 2000 and remove the directors concerned. (LINK 8)

On December 21, 1999 it was reported that CIL filed for bankruptcy. (LINK 9) The former chairman, a Mr. Akira Setogawa, was indicted for tax evasion.

To compound the situation on January 14, 2000, Martin Armstrong was jailed for contempt of court, to be held for 18 months or until he divulges the location of certain missing assets. (LINK 10)

While this may appear to be an open and shut case from a regulators point of view, and certainly given the speed at which authorities moved, coupled with the complexities involved (which does tend to suggest that they were convinced of wrong doing on Armstrong's part) there are some interesting questions that appear not to have been asked.

  1. What were the Japanese investors actually buying?
  2. Are the losses real?
  3. Was pressure applied by Japan's FSA to Armstrong's Japanese clients?
  4. What happened to the FSA's investigation of Lehman Bros? Is it ongoing?
  5. Why has nobody else, including Armstrong's apparent co-conspirator at Republic Bank, been charged?
  6. Why was the Japanese chairman of Cresvale International only indicted for tax evasion?

Certainly, the practice of selling derivative contracts of dubious value was reasonably widespread in Japan at the time. This is evidenced by the censure from the FSA of CSFB and the fact that they were investigating other "foreign" banks. Where "Princeton Notes" a form of a complex derivative contract? Was this simply another method of hiding losses from the Japanese authorities? Who knows? What we do know is that Japan's banking system is still far from being sound. Its regulatory authorities have been criticized on many an occasion for failing to disclose. Armstrong was accused of "holding documents that artificially inflated the true value of the clients holdings". Seems this is not an uncommon practice in corporate Japan.

Given that Republic Bank was on the receiving end of a large and lucrative takeover offer from HSBC, (now completed), the enquiry from the FSA would have been about as welcome as one could imagine. Their first reaction may well have been to pass the inquiry on as quickly as possible, and put as much distance between it and themselves as fast as possible. Damage control would have been a major issue. Needless to say the takeover was delayed for several months (LINK11) and completed in late December (LINK12) The death of the Chairman of Republic Bank, Mr. Edmond Safra in mysterious circumstances (LINK13) also confused the situation.

Armstrong is accused of commingling funds from the Japanese investors, placed in an account at Republic, who were it seems also acting as Trustee, with his own accounts. That's an interesting situation to say the least. It seems that all of Armstrong's assets are now in the hands of the court appointed receiver including personal and corporate accounts. He has no money, a court appointed defense lawyer, is in jail, and he may be there for some time.

His economic forecasting business is still in operation, his remaining staff come to work on a daily basis, the client base is still largely intact and his analysis is still sought after.

Additional material is available at the following website, which is the creation of Mr. Buz Schwartz, a long time friend of Martin Armstrong (LINK 14)

John Batiste
28 March 2000

Link Locations:

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